GUO XIN GROUP LIMITED *

Transcription

1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your shares in Guo Xin Group Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities of Guo Xin Group Limited. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. GUO XIN GROUP LIMITED * (Incorporated in Bermuda with limited liability) (Stock Code: 1215) VERY SUBSTANTIAL ACQUISITION INVOLVING ISSUE OF CONVERTIBLE NOTE AND CONTINUING CONNECTED TRANSACTIONS Financial adviser to the Guo Xin Group Limited SOMERLEY LIMITED Independent financial adviser to the Independent Board Committee and the Independent Shareholders Hercules Capital Limited A letter from the Independent Board Committee (as defined in this circular) containing its recommendations in respect of, among other matters, continuing connected transactions in respect of the Subcontracting Agreement (as defined in this circular) and the Service Agreement (as defined in this circular) to the Independent Shareholders (as defined in this circular) is set out on page 20 of this circular. A letter from Hercules Capital Limited, the independent financial adviser, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 21 to 28 of this circular. A notice convening the SGM (as defined in this circular) to be held at 12/F., 18 Cheong Lok Street, Jordon, Kowloon, Hong Kong, on Wednesday, 23rd February, 2005 at 10:00 a.m. is set out on pages 88 to 90 of this circular. Whether or not you are able to attend the SGM, please complete and return the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Hong Kong branch share registrars and transfer office of the Company, Tengis Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event, not less than 48 hours before the time appointed for holding the SGM or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjourned meeting should you so wish. * For identification purpose only 4th February, 2005

2 CONTENTS Definitions Letter from the Board Letter from the Independent Board Committee Letter of advice from Hercules Appendix I Financial information of the Group Appendix II Financial information regarding the business of marketing and introduction of customers to the Omar III, and the provision of the Settlement Service Appendix III Financial information of Gainnew Appendix IV Pro forma financial information of the Enlarged Group Appendix V General information Notice of SGM Page i

3 DEFINITIONS In this circular, the following expressions shall have the following meanings unless the context indicates otherwise: Acquisition Agreement associates Board Casino Casino Operator Company Completion Consideration Convertible Note Conversion Price Conversion Shares Director(s) Enlarged Group Gainnew the proposed acquisition of the Sale Shares by the Purchaser pursuant to the Agreement the sale and purchase agreement dated 16th December, 2004 entered into between the Vendor and the Purchaser in relation to the Acquisition has the meaning ascribed thereto under the Listing Rules the board of Directors the casino on board Omar III the operator of the Casino Guo Xin Group Limited, a company incorporated in Bermuda with limited liability whose issued Shares are listed on the Stock Exchange completion of the Agreement HK$96,000,000, being the aggregate consideration payable by the Purchaser to the Vendor for the Acquisition the convertible note with a principal amount of HK$46,000,000 to be issued by the Company as partial settlement of the Consideration HK$0.162 per Share, subject to adjustments from time to time, pursuant to the terms and conditions of the Convertible Note new Shares to be issued by the Company upon exercise of the conversion rights by the holder of the Convertible Note pursuant to the terms and conditions of the Convertible Note the director(s) of the Company the Group as enlarged immediately after Completion, comprising the Group and Gainnew Gainnew Group Limited, a company incorporated in the British Virgin Islands with limited liability and is wholly and beneficially owned by the Vendor prior to Completion 1

4 DEFINITIONS Group Hercules Hong Kong HK Power Independent Board Committee Independent Shareholder(s) Keygold Last Trading Day Latest Practicable Date Listing Rules Management Agreement Management Services the Company and its subsidiaries Hercules Capital Limited, a licensed corporation to carry on type 6 regulated activity (advising on corporate finance) under the SFO and the independent financial adviser to the Independent Board Committee and the Independent Shareholders the Hong Kong Special Administrative Region of the PRC HK Power Limited, a company incorporated in the British Virgin Islands with limited liability and is beneficially owned by the Vendor and his associate an independent committee of the Board comprising Mr. Tam Sun Wing, Mr. Ko Ming Tung, Edward and Mr. Ng Ge Bun, all being independent non-executive Directors Shareholder(s) other than (i) the Vendor and his associate; and (ii) any connected person (as defined under the Listing Rules) with a material interest in the Subcontracting Agreement and the Service Agreement Keygold Group Limited, a company incorporated in the British Virgin Islands with limited liability and is wholly and beneficially owned by the Vendor 15th December, 2004, being the last trading day of the Shares on the Stock Exchange immediately prior to the announcement of the Company dated 20th December, 2004, relating to, among other things, the Acquisition 2nd February, 2005, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained herein the Rules Governing the Listing of Securities on the Stock Exchange the management agreement entered into between HK Power and the Casino Operator for three years commencing from 1st November, 2003 the services to be provided by Keygold under the Service Agreement, including the management services provided by Keygold in performing the services as stipulated in the Subcontracting Agreement such as the marketing and introduction of customers to Omar III and the Settlement Services 2

5 DEFINITIONS Macau Mr. Ki or the Vendor Omar III PRC Purchaser the Macau Special Administrative Region of the PRC Mr. Benny Ki a cruise liner with casino, gaming and other facilities on board The People s Republic of China, which for the purpose of this circular shall exclude Hong Kong, Macau and Taiwan Charter Best Investments Limited, a company incorporated in the British Virgin Islands with limited liability and is a wholly owned subsidiary of the Company Sale Shares being 60 ordinary shares of Gainnew, representing 60% of the issued share capital of Gainnew Service Agreement Settlement Service SFO SGM Share(s) the service agreement dated 16th December, 2004 entered into between Keygold and Gainnew provision of services relating to the exchange of gambling chips for the players and HK Power (as a service provider for the Casino Operator) where no money in any form will be settled by Gainnew in its own capacity, in particular, gambling chips will be given to players against (i) production of a bank-in slip demonstrating equivalent amount of money being deposited in the account of HK Power; or (ii) cash payment whereby such cash will not be received by Gainnew in its own capacity but will be passed along in full to HK Power (as service provider for the Casino Operator) the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended from time to time the special general meeting of the Company to be convened and held at 12/F., 18 Cheong Lok Street, Jordon, Kowloon, Hong Kong on Wednesday, 23rd February, 2005 at 10:00 a.m. to consider and, if thought fit, to approve (i) the Agreement, the issue of the Convertible Note and the Conversion Shares upon conversion of the Convertible Note; (ii) the Subcontracting Agreement; and (iii) the Service Agreement, the transactions contemplated under the Subcontracting Agreement and Service Agreement and their respective annual monetary caps share(s) of HK$0.1 each in the share capital of the Company 3

6 DEFINITIONS Shareholder(s) Stock Exchange Subcontracting Agreement HK$ holder(s) of the Share(s) The Stock Exchange of Hong Kong Limited the subcontracting agreement dated 16th December, 2004 entered into between Gainnew, HK Power and the Vendor Hong Kong dollars, the lawful currency of Hong Kong % per cent. 4

7 LETTER FROM THE BOARD GUO XIN GROUP LIMITED * (Incorporated in Bermuda with limited liability) (Stock Code: 1215) Executive Directors: Zhang Yang (Chairman) Lam Cheung Shing, Richard Independent non-executive Directors: Tam Sun Wing Ko Ming Tung, Edward Ng Ge Bun Registered office: Canon s Court 22 Victoria Street Hamilton, HM 12 Bermuda Principal place of business in Hong Kong: 12/F., 18 Cheong Lok Street Jordon, Kowloon Hong Kong 4th February, 2005 To the Shareholders Dear Sir or Madam, VERY SUBSTANTIAL ACQUISITION INVOLVING ISSUE OF CONVERTIBLE NOTE AND CONTINUING CONNECTED TRANSACTIONS INTRODUCTION On 20th December, 2004, the Board announced that on 16th December, 2004, Charter Best Investments Limited, a wholly owned subsidiary of the Company, entered into the Agreement with Mr. Ki in relation to the Acquisition. Upon Completion, Gainnew will become a non-wholly owned subsidiary of the Company and will be owned as to 40% by the Vendor and as to 60% by the Group. On 16th December, 2004 Gainnew also entered into the Subcontracting Agreement with HK Power, a company owned by the Vendor and his associate. Under the Subcontracting Agreement, Gainnew is responsible for the marketing and introduction of customers to Omar III, and the provision of the Settlement Service during the opening hours of the Casino. In addition, Gainnew also entered into the Service Agreement with Keygold, a company wholly and beneficially owned by the Vendor, whereby Keygold will act as Gainnew s consultant to provide the Management Services to Gainnew. * For identification purpose only 5

8 LETTER FROM THE BOARD The Acquisition constitutes a very substantial acquisition for the Company under the Listing Rules. As the Vendor will own 40% of the issued share capital of Gainnew upon Completion, the Vendor will become a connected person (as defined under the Listing Rules) of the Company upon Completion. The Subcontracting Agreement and the Service Agreement will therefore constitute non-exempt continuing connected transactions for the Company upon Completion and is subject to the reporting, announcement and Independent Shareholders approval requirement under Chapter 14A of the Listing Rules. An Independent Board Committee comprising all independent non-executive Directors, has been established to advise the Independent Shareholders on whether or not (i) the transactions contemplated under the Subcontracting Agreement and the Service Agreement are in the interests of the Company and the Independent Shareholders; and (ii) the respective terms and conditions of the Subcontracting Agreement and the Service Agreement and the respective annual monetary caps for the transactions contemplated thereunder for the period from Completion to each of the financial years ending 30th June, 2005, 2006 and 2007 are fair and reasonable so far as the Independent Shareholders are concerned. Hercules has been appointed the independent financial adviser to advise the Independent Board Committee in respect of the terms of the Subcontracting Agreement, the Service Agreement and the respective annual monetary caps for the transactions to be made thereunder. The purpose of this circular is to (i) provide you with further details on the Agreement, the Subcontracting Agreement and the Service Agreement; (ii) to set out the advice of Hercules to the Independent Board Committee in respect of, and the recommendation of the Independent Board Committee to the Independent Shareholders in respect of, the terms of the Subcontracting Agreement, Service Agreement, the respective transactions to be made under the Subcontracting Agreement and the Service Agreement for the period from Completion to each of the financial years ending 30th June, 2005, 2006 and 2007 and the respective annual monetary caps thereunder; and (iii) to give you the notice of the SGM and other information required under the Listing Rules. THE AGREEMENT Date: 16th December, 2004 Purchaser: Vendor: Charter Best Investments Limited, a wholly owned subsidiary of the Company Mr. Ki, who, to the best of the Directors knowledge, information and belief having made all reasonable enquiry, is a third party independent of the Company and its connected person (as defined under the Listing Rules). Mr. Ki became acquainted with the Group through their mutual business connection. Assets to be acquired Pursuant to the Agreement, the Purchaser has agreed to acquire and the Vendor has agreed to dispose of, subject to the terms and conditions of the Agreement, 60 shares of Gainnew, representing 60% of the issued share capital of Gainnew. After Completion, Gainnew will become a 60% owned subsidiary of the Company and its accounts will be consolidated into the accounts of the Group. The Vendor will continue to hold the remaining 40% of the issued share capital of Gainnew. 6

9 LETTER FROM THE BOARD Gainnew was incorporated on 18th November, 2004 and has not commenced any significant business operations except for entering into the Subcontracting Agreement and the Service Agreement immediately prior to the parties entering into the Agreement. Gainnew will be principally engaged in the marketing and introduction of customers to Omar III and the provision of the Settlement Service to HK Power during the opening hours of the Casino pursuant to the Subcontracting Agreement. Save for the paid-up capital of HK$780, Gainnew did not have any material assets or liabilities as at the date of the Agreement. At present, the Group has no intention to acquire any interest in Omar III. The Subcontracting Agreement Pursuant to the Management Agreement entered into between the Casino Operator and HK Power, HK Power is responsible for, among other services, the marketing and introduction of customers to Omar III and the provision of the Settlement Service during the opening hours of the Casino when Omar III is in international waters. In consideration of services provided to the Casino Operator, HK Power is remunerated by fees calculated in accordance with the Management Agreement. The Management Agreement has an initial term of three years commencing from 1st November, 2003 when Omar III was about to begin its operations. The Management Agreement is renewable for another three years upon the expiry of the initial term. In view of the Group s established network in the travel related operations through its travel agency business, Gainnew, which will become a 60% owned subsidiary of the Company, entered into the Subcontracting Agreement with HK Power on 16th December, The Vendor and the Group consider that they could leverage on the Group s network in the travel related business to introduce more customers to Omar III. The Subcontracting Agreement has a term from 16th December, 2004 and will expire on the earlier of 31st October, 2006 (or 15th December, 2007 should the term of the Management Agreement have been renewed in accordance with the terms thereof) or the date on which the Management Agreement terminates. Under the Subcontracting Agreement, HK Power has agreed to subcontract the marketing and introduction of customers to Omar III and the provision of the Settlement Service from its obligations under the Management Agreement to Gainnew. The Settlement Services involves provision of services relating to the exchange of gambling chips for the players and HK Power (as a service provider for the Casino Operator) where no money in any form will be settled by Gainnew in its own capacity, in particular, gambling chips will be given to players against (i) production of a bank-in slip demonstrating equivalent amount of money being deposited in the account of HK Power; or (ii) cash payment whereby such cash will not be received by Gainnew in its own capacity but will be passed along in full to HK Power (as service provider for the Casino Operator). Gainnew will not involve in the direct operation or management of the Casino and gaming activities on board Omar III. In consideration for the services to be provided by Gainnew to HK Power, Gainnew shall be entitled under the Subcontracting Agreement to certain portion of the fees which HK Power is entitled to under the Management Agreement in respect of the services subcontracted to Gainnew. Under the Subcontracting Agreement, Gainnew shall receive (i) a commission calculated at 1.45% of the rolling turnover (being the amount of gambling chips exchanged for Casino players under the Settlement Service) of the Casino; (ii) a management fee which is 7

10 LETTER FROM THE BOARD calculated at (a) 0.2% of the total rolling turnover of the Casino; and (b) 40% of the gross profit of the Casino after deducting certain expenses including rental for the Casino premises and rolling commission payable to HK Power. The Directors consider that the commission, management fee and the profit sharing arrangement under the Subcontracting Agreement, which mirror substantially the same terms as agreed between the Casino Operator and HK Power on an arm s length basis under the Management Agreement, are fair and reasonable. For the period from 1st November, 2003 to 30th November, 2004, the revenue and profit attributable to the operation that would be carried out by Gainnew under the Subcontracting Agreement amounted to approximately HK$445.3 million and HK$118.0 million respectively had the Subcontracting Agreement and the Service Agreement (as discussed below) become effective on 1st November, The Subcontracting Agreement will constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules. Details of the continuing connected transactions are set out in the section below titled Continuing Connected Transactions. Consideration The Consideration is HK$96 million. The Consideration was arrived at after arm s length negotiations between the Purchaser and the Vendor with reference to profits of approximately HK$118.0 million attributable to the operations of Gainnew for the period from 1st November, 2003 to 30th November, 2004 had the Subcontracting Agreement and the Service Agreement been in place on 1st November On an annualised basis, the profit would be approximately HK$108.9 million. The Consideration represents approximately 1.47 times of the Group s interest in the profit of approximately HK$65.3 million attributable to the operation to be carried out by Gainnew for the twelve months ended 30th November, The Consideration will be settled as follows: (i) (ii) a cash deposit of HK$50 million, payable to the Vendor on the date of the Agreement. This deposit will be refunded (without interest) to the Purchaser if any of the conditions to the Agreement cannot be satisfied; and the Convertible Note in the principal amount of HK$46 million to be issued by the Company to the Vendor on Completion. The cash portion of the Consideration will be satisfied by internal resources of the Group. The principal terms of the Convertible Note to be issued by the Company will be as follows: Principal amount Maturity date Interest HK$46,000,000 On the third anniversary of the date of the Convertible Note. 5% per annum, accrued on a day-to-day basis, calculated at simple interest rate, payable semi-annually in arrears commencing six months after the date of issue of the Convertible Note. 8

11 LETTER FROM THE BOARD Transferability No assignment or transfer may be made until the expiry of the exercise period of the Call Option (as described below), and any assignment or transfer thereafter may only be made if: (i) (ii) it is made to person(s) independent of and not connected with any of the directors, chief executive and substantial shareholders of the Company or any of its subsidiaries or any of their respective associates; the Company has obtained prior written approval from the Stock Exchange in relation to the transfer (if applicable); and (iii) the principal amount to be transferred or assigned is at least HK$500,000 or integral multiples of HK$500,000. Conversion Price HK$0.162 per Share. The Conversion Price represents: (i) (ii) the average closing price of the Shares as stated in the Stock Exchange s quotations sheets for 30 trading days up to and including the Last Trading Day but excluding the suspension of trading in the Shares on the Stock Exchange on 11th and 12th November, 2004; a discount of approximately 7.9% to the average closing price of HK$0.176 per Share as stated in the Stock Exchange s daily quotation sheets for the 10 trading days up to and including the Last Trading Day; (iii) a discount of approximately 17.3% to the closing price of HK$0.196 per Share as quoted on the Stock Exchange on the Last Trading Day. Conversion Redemption Unless redemption notice shall have been given by the Company, holder of the Convertible Note shall have the right to convert the whole or part of the principal amount of the Convertible Note (other than that part of the principal amount to which a redemption notice relates and in amounts of not less than a whole multiple of HK$500,000 on each conversion) into Shares at the Conversion Price at any time prior to 4:00 p.m. on the Maturity Date. Holder of the Convertible Note shall have the right at any time to require the Company to redeem (in amount of not less than a whole multiple of HK$500,000) the whole or part of the outstanding principal amount of the Convertible Note by giving the Company not less than 7 days prior notice to make such redemption. Holder of the Convertible Note will be paid an amount equal to 105% of the outstanding principal amount of the Convertible Note upon redemption together with interest accrued and other amounts owing thereon. 9

12 LETTER FROM THE BOARD Unless a notice of conversion shall have previously been given by the holder of the Convertible Note to the Company, the Company shall also have the right to redeem (in amount of not less not a whole multiple of HK$500,000) the whole or part of the outstanding principal amount of the Convertible Note by giving the holder of the Convertible Note not less than 7 days prior notice to make such redemption. The Company will have to pay an amount equal to 105% of the outstanding amount of the Convertible Note to be redeemed, together with interest accrued and other amounts owing thereon. Cancellation Adjustment to the Conversion Price Voting Listing Upon completion of the exercise of the Call Option (as described below), the outstanding Convertible Note shall be deemed cancelled and the holder of the Convertible Note shall have no rights and obligations against the Company under the Convertible Note. The Conversion Price is also subject to adjustments for, among other matters, subdivision or consolidation of Shares, bonus issues, rights issues and other dilutive events. Holder of the Convertible Note will not be entitled to attend or vote at any meetings of the Company by reason only of it being so. The Convertible Note will not be listed on the Stock Exchange or any other stock exchanges. An application will be made to the Stock Exchange for the listing of and the permission to deal in the Conversion Shares. A total of 283,950,617 Conversion Shares will fall to be issued upon full conversion of the Convertible Note, representing approximately 6.33% of the issued share capital of the Company as at the Latest Practicable Date and approximately of 5.95% of the enlarged issued share capital of the Company upon the full conversion of the Convertible Note and the allotment and issue of the Conversion Shares. The Conversion Shares will be issued under the specific mandate to be granted to the Directors at the SGM. The Conversion Shares will rank pari passu in all respects with the Shares in issue as at the date of conversion. Conditions Completion is subject to and conditional upon the fulfilment of the following conditions precedent on or before 15th March, 2005 (or such later date as shall be agreed by the Purchaser in writing): (i) (ii) the Shareholders having approved at the SGM among other things, the Agreement, and the Acquisition contemplated thereunder, the issue of the Convertible Note and the allotment and issue of the Conversion Shares; the Independent Shareholders having approved at the SGM the Subcontracting Agreement, the Service Agreement and the transactions contemplated thereunder; 10

13 LETTER FROM THE BOARD (iii) the Purchaser having conducted the due diligence review of, among other matters, the financial and legal matters and business of Gainnew, the result of which does not show material breach of the warranties given by the Vendor under the Agreement; (iv) the Company having obtained the approval granted by the Listing Division of the Stock Exchange for the listing of and permission to deal in the Conversion Shares to be issued by the Company upon conversion of the Convertible Note; (v) the allotment and issue of the Conversion Shares being approved by the Bermuda Monetary Authority (if applicable); (vi) the transactions contemplated under the Agreement is in compliance with Chapter 14 and 14A of the Listing Rules and there being no objection from the Stock Exchange or other regulatory authorities in relation to the transactions contemplated under the Agreement (including, among others, the Acquisition, the services provided under the Subcontracting Agreement and the Service Agreement) and there being no conditions imposed by such regulatory authorities which are not acceptable to the Purchaser; (vii) the Vendor having obtained a legal opinion in respect of the relevant rules and regulations regarding the legality of Gainnew s business; and (viii)all the representation, confirmation and warranties given by the Vendor remaining true and accurate and are not misleading in any material aspect. The Purchaser may at its absolute discretion, waive in writing, at any time, any of the above conditions except conditions (i), (ii), (iv), (vi) and (vii) above. In the event any of the conditions are not fulfilled or (where applicable) waived prior to 5:00 p.m. on 15th March, 2005 (or such other date as the Purchaser may agree), the Agreement shall lapse and no party to the Agreement shall have any claim against or liability to the other parties, save in respect of any antecedent breach of the Agreement. As at the Latest Practicable Date, none of the conditions above have been fulfilled except for item (vii) and the Group has no intention to waive any of the remaining conditions. Completion Completion shall take place on the first calendar day (or such later date as the parties may agree) of the calendar month immediately following the date on which all of the above conditions have been fulfilled (or waived, where applicable). In the event that Completion does not take place as agreed, either party has the right to (i) extend the Completion to no longer than 14 days after the initial date of completion; (ii) to proceed with the Completion; or (iii) terminate the Agreement. After Completion, no parties to the Agreement may dispose, transfer, assign or pledge any shares of Gainnew to any third parties without obtaining the other party s consent. At present, Mr. Ki is the sole director of Gainnew. It is the present intention of the Company that after Completion, the board of Gainnew will comprise three directors, two of whom will be nominated by the Group. 11

14 LETTER FROM THE BOARD OTHER PRINCIPAL TERMS OF THE AGREEMENT The Call Option The Vendor represented to the Group that the rolling turnover of the Casino onboard Omar III for the twelve (12) months preceding the date of the Agreement, was, on average, approximately HK$1,800,000,000 per month. It is expected that Gainnew may leverage on the network of the Group in its travel related business (such as the provision of travel agency services) to bring the rolling turnover of the Casino to HK$3,000,000,000 (the Target ) per month. The Vendor has been granted a call option under the Agreement (the Call Option ) whereby the Vendor is entitled to request the Purchaser to sell to the Vendor (or such other nominee(s) as he may direct) the entire Sale Shares at an aggregate consideration of HK$96,000,000 should the rolling turnover of the Casino be less than the Target in any month during the three (3) month period after Completion. The Call Option may be exercised by the Vendor within 21 days after the occurrence of the relevant event. Upon exercise of the Call Option, the Vendor shall settle the consideration of HK$96,000,000 by way of cancelling all outstanding Convertible Note and the remaining balance shall be settled by cashier order or any other means acceptable by both parties. EFFECT OF THE ACQUISITION ON THE SHAREHOLDING STRUCTURE Set out below is the Company s (i) shareholding structure as at the Latest Practicable Date; and (ii) the shareholding structure upon full conversion of the Convertible Note: Shareholding structure Existing after full conversion shareholding structure of the Convertible Note Number of Shares % Number of Shares % Sourcebase Developments Limited (note 1) 750,000, % 750,000, % Vendor/Holder of the Convertible Note (note 2) 170,000, % 453,950, % Other public Shareholders 3,564,683, % 3,564,683, % 4,484,683, % 4,768,633, % Note 1: Sourcebase Developments Limited is beneficially owned by Mr. Zhang Yang, who is a Director and the chairman of the Company. Note 2: Subsequent to the issue of the announcement dated 20th December, 2004, in relation to, among other matters, the Acquisition, the Vendor has acquired an aggregate of 170,000,000 Shares. Upon full conversion of the Convertible Note, the Vendor will hold approximately 9.52% of equity interest of the Enlarged Group. However, there will be no change in control of the Company upon Completion or immediately after full conversion of the Convertible Note. THE SERVICE AGREEMENT Gainnew entered into the Service Agreement with Keygold, a company wholly and beneficially owned by the Vendor, on 16th December, 2004 pursuant to which Keygold was appointed as Gainnew s consultant to provide the Management Services to Gainnew in performing the services as stipulated in the Subcontracting Agreement. The term of the Service 12

15 LETTER FROM THE BOARD Agreement commenced from 16th December, 2004 and will expire on the earlier of 31st October, 2006 (or 15th December, 2007, should the term of the Management Agreement have been renewed in accordance with the terms thereof) or the date on which the Management Agreement terminates. In consideration of the Management Services to be provided, Gainnew will pay Keygold a consultancy fee which is equivalent to 5% of Gainnew s management fee receivable under the Subcontracting Agreement (being calculated at (a) 0.2% of the total rolling turnover of the Casino; and (b) 40% of the gross profit of the Casino after deducting certain expenses including rental and rolling commission payable to HK Power). Under the Service Agreement, Keygold will procure Mr. Ki as its manager to carry out the consultancy work to be provided to Gainnew. Keygold will also procure Mr. Ki to comply with the relevant rules and regulation under relevant jurisdiction as well as to follow the instructions given from Gainnew s board of directors. Gainnew may terminate the Service Agreement prior to the expiry date if Mr. Ki can no longer perform his services under the Service Agreement unless Keygold is able to identify and appoint suitable personnel to replace Mr. Ki within thirty days after Mr. Ki s incapacity. In the event the Service Agreement was terminated before the Subcontracting Agreement expired, the Company would seek appropriate consultants to carry out the Management Services according to the terms of Subcontracting Agreement. The Service Agreement constitutes continuing connected transactions of the Company under Chapter 14A of the Listing Rules. Details on the continuing connected transactions are set out in the section below titled Continuing Connected Transactions. BACKGROUND TO AND REASONS FOR THE ACQUISITION The Group is principally engaged in property investment, provision of travel agency services (such as ticketing and hotel reservation services) and trading. For the two years ended 30th June, 2003 and 2004, the Group recorded turnover of approximately HK$3.99 million and HK$ million respectively. For the two years ended 30th June, 2003 and 2004, the Group recorded consolidated loss of approximately HK$24.13 million and HK$7.18 million respectively. As at 30th June, 2003 and 2004, the audited consolidated net assets of the Group was approximately HK$ million and HK$ million respectively. Given the Group has suffered losses in the past two consecutive financial years, the Board has been actively exploring ways to broaden its revenue base. Having considered (i) the relaxation of the restrictions concerning mainland individuals visiting Hong Kong and Macau; and (ii) the implementation of the Closer Economic Partnership Agreement which stimulates tourism and gaming activities around the region, the Directors believe that the Group could leverage on its network in the travel related business to pursue the business that Gainnew will be engaged in pursuant to the Subcontracting Agreement. The executive Directors are of the view that the respective terms and conditions of the Agreement (including the Consideration), the Subcontracting Agreement and the Service Agreement are fair and reasonable and the transactions contemplated under the Agreement, the Subcontracting Agreement and the Service Agreement are in the interests of the Company and the Shareholders as a whole. 13

16 LETTER FROM THE BOARD FINANCIAL EFFECTS OF THE ACQUISITION Net asset value As set out in the unaudited pro forma consolidated balance sheet of the Enlarged Group in Appendix IV to this circular, the net asset value of the Group will decrease from HK$257.9 million to HK$256.4 million. The decrease of HK$1.5 million represents the professional fee incurred in relation to the Acquisition. Prior to Completion, the Group had an audited adjusted consolidated net tangible asset value of approximately HK$0.057 per Share (based on 4,484,683,140 Shares in issue as at the Latest Practicable Date). Upon Completion and on the assumption that the Convertible Note is converted in full, the pro forma unaudited adjusted net tangible asset value of the Enlarged Group would be reduced to approximately HK$0.020 per Share (based on the enlarged issued share capital of 4,768,633,757 Shares), which is mainly attributable to the deduction of the professional fee incurred arising from the Acquisition). Gearing The gearing ratio (a percentage of total borrowings over total assets) of the Group as at 30th June, 2004 was 38.0%. Based on the pro forma assets and liabilities statement of the Enlarged Group, the gearing ratio of the Enlarged Group as at 30th November, 2004 would be 52.3%. The Directors consider the increase in the gearing ratio would have no material adverse impact on the Group s cashflow or financial position. Earnings The Group incurred audited consolidated net losses of HK$7,182,000 for the year ended 30th June, In order to improve the financial results of the Group, the Directors are actively exploring ways to broaden its revenue base. As set out in the pro forma income statement of the Enlarged Group, the result of the Enlarge Group would improve after Completion. Upon Completion, an intangible asset of approximately HK$160 million would arise and such goodwill will be amortised and charged to the consolidated profit and loss accounts of the Enlarged Group on a straight line basis over its estimated useful lives. It is estimated that the annual amortisation expense of the intangible asset will amount to HK$85.3 million. Despite that, the Directors consider that the transaction represents a reasonable opportunity for the Group to enlarge its business scope and broaden its revenue stream. IMPLICATION OF THE LAWS OF HONG KONG AND THE LISTING RULES AND RELEVANT LAWS IN OTHER JURISDICTIONS Based on the Hong Kong legal opinion and legal opinion from other relevant jurisdictions obtained by the Company, it is confirmed that the services provided by Gainnew under the Subcontracting Agreement will not constitute an unlawful activity under the laws of Hong Kong, in particular, the Gambling Ordinance (Chapter 148 of the Laws of Hong Kong), and the laws of other relevant jurisdictions. The Board confirms that Gainnew will, and is confident that it can, comply with and will use its best endeavours to procure the services to be provided by Gainnew under the Subcontracting Agreement to comply with all relevant laws and regulations of Hong Kong and other areas, where the operations of Gainnew are being carried out, that are in effect from time to time. 14

17 LETTER FROM THE BOARD In addition, the management of the Company, together with Mr. Ki will contribute their knowledge and expertise, so as to formulate and strengthen the relevant internal control systems and risk management measures to avoid any violation in rules or regulation. Shareholders should be aware that under the guidelines issued by the Stock Exchange in relation to Gambling Activities Undertaken by Listing Applicants and/or Listed Issuers, should Gainnew be in breach of any laws or regulations of Hong Kong, the Company or its business may be considered unsuitable for listing under Rule 8.04 of the Listing Rules and the Stock Exchange may suspend or cancel the listing of the Shares on the Stock Exchange. CONTINUING CONNECTED TRANSACTIONS As the Vendor will own 40% of the issued share capital of Gainnew upon Completion, the Vendor will be a substantial shareholder of Gainnew and therefore a connected person (as defined under the Listing Rules) of the Company. The transactions stipulated under the Subcontracting Agreement and the Service Agreement will therefore constitute non-exempt continuing connected transactions for the Company under Chapter 14A of the Listing Rules upon Completion. The Subcontracting Agreement The aggregate value of the service fee payable by HK Power to Gainnew under the Subcontracting Agreement, which comprises of (i) a commission; and (ii) a management fee calculated on the basis as set out in the paragraph headed The Subcontracting Agreement in the section headed The Agreement above, is expected to exceed HK$10 million per annum, the transactions contemplated thereunder will therefore constitute non-exempt continuing connected transactions for the Company under Rule 14A.35 of the Listing Rules and are subject to the reporting, announcement and Independent Shareholders approval requirements under the Listing Rules. Listing Rules implications The Company will seek the approval by the Independent Shareholders by way of a poll at the SGM of the continuing connected transactions in respect of the Subcontracting Agreement and the annual monetary caps (as mentioned below), for the period from Completion to each of the financial years ending 30th June, 2005, 2006 and In addition the Company will also be required to comply with other relevant Listing Rules requirements which, among others, include: (a) the aggregate amount of (i) a commission; and (ii) a management fee payable by HK Power to Gainnew for the period from Completion to each of the financial year ending 30th June, 2005, 2006 and 2007 will not exceed HK$395 million, HK$873 million and HK$1,004 million respectively; 15

18 LETTER FROM THE BOARD (b) the continuing connected transactions in respect of the Subcontracting Agreement will be in compliance with the following: (i) (ii) the continuing connected transactions in respect of the Subcontracting Agreement will be entered into in the usual and ordinary course of businesses of the Group after Completion; the continuing connected transactions in respect of the Subcontracting Agreement will be conducted either on normal commercial terms, or if there is no available comparison, on terms no less favourable to the Group after Completion than terms available from independent third parties; and (iii) the continuing connected transactions in respect of the Subcontracting Agreement will be entered into in accordance with the terms of the Subcontracting Agreement that are fair and reasonable and in the interests of the Shareholders as a whole; and (c) compliance by the Company with all other relevant requirements in effect under the Listing Rules from time to time. Basis for the annual monetary caps in respect of the Subcontracting Agreement The Directors expect that the amount of the service fee payable by HK Power to Gainnew for the period from Completion to each of the financial years ending 30th June, 2005, 2006 and 2007 in respect of the Subcontracting Agreement will not exceed the following annual monetary caps: For the year ending 30th June, (HK$ million) (HK$ million) (HK$ million) Annual monetary caps ,004 The above annual monetary caps are determined by reference to (a) the expected monthly rolling turnover of HK$3 billion for the year ending 30th June, 2005, and an anticipated growth of 20% and 15% for each of the financial years ending 30th June, 2006 and 2007 respectively in light of the probable increase in the number of visitors of Omar III resulting from the growth in tourism in Hong Kong and the region, and (b) the historical net profit of the Casino (without taking into account the months during which the Casino incurred a loss since Gainnew is not required to bear the loss of the Casino) and that the net profit of the Casino will grow at the same rate with the anticipated growth in the rolling turnover of the Casino. The Service Agreement The consultancy fee payable by Gainnew to Keygold under Service Agreement, which is equivalent to 5% of Gainnew s management fee receivable under the Subcontracting Agreement (being calculated at (a) 0.2% of the total rolling turnover of the Casino; and (b) 40% of the gross profit, after deducting certain expenses of the Casino) is expected to exceed HK$10 million per annum, the transactions stipulated under the Service Agreement therefore constitute 16

19 LETTER FROM THE BOARD non-exempt continuing connected transactions for the Company under Rule 14A.35 of the Listing Rules and are subject to the reporting, announcement and Independent Shareholders approval requirements under the Listing Rules. Listing Rules implications The Company will seek approval by the Independent Shareholders by way of a poll at the SGM of the continuing connected transactions in respect of the Service Agreement, and the annual monetary caps (as mentioned below), for the period from Completion to each of the financial years ending 30th June, 2005, 2006 and In addition, the Company will also be required to comply with other relevant Listing Rules requirements which, among others, include: (a) (b) the consultancy fee payable by Gainnew to Keygold for the period from Completion to each of the financial years ending 30th June, 2005, 2006 and 2007 will not exceed HK$5.6 million, HK$12.4 million and HK$14.2 million respectively; the continuing connected transactions in respect of the Service Agreement will be in compliance with the following: (i) (ii) the continuing connected transactions in respect of the Service Agreement will be entered into in the usual and ordinary course of businesses of the Group after Completion; the continuing connected transactions in respect of the Service Agreement will be conducted either on normal commercial terms, or if there is no available comparison, on terms no less favourable to the Group after Completion than terms available from independent third parties; and (iii) the continuing connected transactions in respect of the Service Agreement will be entered into in accordance with the terms of the Service Agreement that are fair and reasonable and in the interests of the Shareholders as a whole; and (c) compliance by the Company with all other relevant requirements in effect under the Listing Rules from time to time. Basis for the annual monetary caps in respect of the Service Agreement The Directors expect that the amount of the consultancy fee payable by Gainnew to Keygold for each of the financial years ending 30th June, 2005, 2006 and 2007 will not exceed the following annual monetary caps: For the year ending 30th June, (HK$ million) (HK$ million) (HK$ million) Annual monetary caps

20 LETTER FROM THE BOARD The above annual monetary caps are determined by reference to the estimated service fee to be received by Gainnew from Completion to each of the financial years ending 30th June, 2005, 2006 and 2007 on the basis as set out in the paragraph headed The Subcontracting Agreement in this section. SPECIFIC MANDATE TO ISSUE SHARES A resolution will be put to the Shareholders at the SGM to approve the granting of a specific mandate to Directors for the creation and issue of the Convertible Note and the allotment and issue of the Conversion Shares. SGM A notice of SGM (to be held at 12/F., 18 Cheong Lok Street, Jordon, Kowloon, Hong Kong on Wednesday, 23rd February, 2005 at 10:00 a.m., Hong Kong, for the purpose of considering and, if thought fit, approving the (i) the Agreement, the issue of the Convertible Note and the Conversion Shares upon conversion of the Convertible Note; (ii) the Subcontracting Agreement; and (iii) the Service Agreement, the transactions contemplated under the Subcontracting Agreement and Service Agreement and their respective annual monetary caps is set out on pages 88 to 90 of this circular. Mr. Ki is the Vendor under the Agreement and the beneficial owner of HK Power and Keygold, being the counterparties to the Subcontracting Agreement and the Service Agreement. Therefore, Mr. Ki and his associate(s) will abstain from voting at the SGM on the resolutions in relation to the Subcontracting Agreement, the Service Agreement and the transactions contemplated thereunder, as well as the annual monetary caps for the transactions in respect of the Subcontracting Agreement and the Service Agreement (being resolutions numbered 2 and 3 as set out in the notice of SGM). Whether or not you are able to attend the meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return it to the Hong Kong branch share registrars and transfer office of the Company, Tengis Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from subsequently attending and voting in person at the SGM or any adjourned meeting thereof should you so wish. PROCEDURES FOR DEMANDING A POLL Pursuant to bye-law 66 of the bye-laws of the Company, a poll may be demanded in relation to a resolution put to the vote of any general meeting before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll: (a) (b) by the chairman of such meeting; or by at least three Shareholders present in person, or in case of the Shareholder being a corporation by its duly authorised representative, or by proxy for the time being entitled to vote at the meeting; or 18

21 LETTER FROM THE BOARD (c) (d) by any Shareholder or Shareholders present in person, or in case of the Shareholder being a corporation by its duly authorised representative, or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or by any Shareholder or Shareholders present in person, or in case of the Shareholder being a corporation by its duly authorised representative, or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right. RECOMMENDATIONS Your attention is drawn to the letter from the Independent Board Committee set out on page 20 of this circular. The Independent Board Committee, having taken into account the advice of Hercules, the text of which is set out on pages 21 to 28 of this circular, considers that the terms of the Subcontracting Agreement and the Service Agreement are fair and reasonable so far as the Independent Shareholders are concerned and that the transactions contemplated under the Subcontracting Agreement and the Service Agreement to be made in each of the financial years ending 30th June, 2005, 2006 and 2007 and the respective annual monetary caps are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Directors and the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolutions to be proposed at the SGM to approve the Subcontracting Agreement and the Service Agreement, the transactions contemplated under the Subcontracting Agreement and Service Agreement to be made in each of the financial years ending 30th June, 2005, 2006 and 2007 and the respective annual monetary caps. The Directors believe that the Acquisition is on normal commercial terms and in the interest of the Company and the Shareholders as a whole and the terms and conditions of the Agreement, including the terms and conditions of the Convertible Note to be issued pursuant thereto are fair and reasonable so far as the Shareholders are concerned. Accordingly, the Directors recommend the Shareholders to vote in favour of the resolutions to be proposed at the SGM to approve the Agreement, the issue of the Convertible Note and the Conversion Shares upon conversion of the Convertible Note. FURTHER INFORMATION Your attention is drawn to the letter of advice from the Independent Board Committee, the letter of advice from Hercules and the additional information set out in the appendices in this circular. Yours faithfully, For and on behalf of the Board Lam Cheung Shing, Richard Director 19